Mumbai: The Reserve Bank of India (RBI) has cautioned that elevated valuations in AI-related stocks could pose a significant risk to global financial stability, with any sharp correction in international equity markets likely to spill over into India. The warning was issued in the central bank’s latest Financial Stability Report (FSR), which highlighted growing concerns over concentrated market gains, rising debt-funded AI investments, and increasing interconnectedness across global financial markets.
According to the RBI, AI-driven investments are no longer confined to equity markets but have expanded into bond markets and other financial segments. The report noted that several economies, including South Korea, Taiwan, and Japan, have witnessed a strong rally in AI-linked stocks, accompanied by heightened volatility. In many of these markets, a small number of technology companies have accounted for a disproportionate share of stock market gains, raising concerns about excessive concentration.
The central bank observed that the recent outperformance of several emerging markets has largely been driven by AI-related companies rather than broad-based economic strength. It warned that a sell-off in these heavily valued firms could trigger wider market declines, particularly in the United States, and create ripple effects across global markets through reduced investor wealth and weakened market sentiment.
The RBI also highlighted the increasing use of debt financing to fund AI infrastructure. Large technology firms, often referred to as hyperscalers, have significantly increased debt issuances over the past two years as they ramp up capital expenditure on AI development despite declining free cash flows. With AI-related spending expected to rise further, borrowing is likely to increase, creating additional financial vulnerabilities.
The report cautioned that an AI-led correction could extend beyond equity markets. Banks may face indirect risks through their exposure to private credit firms and other financial intermediaries that are financing AI-related projects. Such interconnected exposures, the RBI said, could amplify systemic risks if market conditions deteriorate.
The central bank also pointed to stretched valuations in the United States, noting that multiple measures of equity valuations remain near the upper end of historical ranges. It added that global exposure to US equities has grown sharply, with foreign holdings increasing from $7.5 trillion in March 2020 to $21 trillion in March 2026, making global investors more vulnerable to any correction in US markets.
The RBI’s concerns come amid recent turbulence in Asian markets. South Korea’s benchmark Kospi index suffered a 10 percent decline in a single week, triggering a market-wide circuit breaker as fears of an AI-driven asset bubble intensified. The index had more than doubled earlier in the year, while shares of major AI-linked companies such as SK Hynix and Samsung Electronics had surged dramatically before falling over 12 percent during the correction.
The RBI said these developments underscore the need for investors and policymakers to remain vigilant as AI continues to reshape global capital markets. While AI presents significant long-term growth opportunities, the central bank warned that excessive valuations and concentrated investments could create financial instability if market expectations fail to match underlying fundamentals.
